Commentary: D.C. needs to change affordable housing law if it truly wants to promote homeownership

By Shiv Newaldass
Monday, August 23, 2010

Despite the real estate crisis and the resulting increase in the foreclosure rate in the United States, few can deny the economic and social benefits of homeownership. Almost two-thirds of all U.S. households live in owner-occupied homes, propelled by a time-tested wealth-generating tool used by Americans of all classes: equity.

Yet the District's homeownership rate, at 40.2 percent, is the lowest in the country. As a Capital Business article pointed out ["Affordable housing law posts a big goose egg," July 26], the city's "inclusionary zoning" law -- introduced a year ago to create more affordable housing -- is exacerbating rather than helping the situation.

The law mandates that developers build affordable units within their new residential developments, and in exchange they get bonus zoning density. To ensure a perpetual stock of affordable housing, the law also requires a permanent resale restriction -- essentially prohibiting owners from reaping a profit when they sell their homes -- to be placed on all affordable units built under the program.

D.C.'s inclusionary zoning law, which is more restrictive than similar mandates in other jurisdictions across the Washington region, hurts homeowners, developers and eventually the city.

Jeff Gelman, chairman of the District of Columbia Building Industry Association's housing committee, testified at a public hearing in June that the restrictions "seek to create a perpetual affordable housing stock, but in reality, deny the intended beneficiaries -- low and moderate income families -- from the valuable attribute of true homeownership. Instead, a lower-income family is making a mortgage payment and paying taxes on housing that is essentially rental housing. A home that does not provide the homeowner with equity appreciation is essentially a rental unit, and it is a mischaracterization for government programs to tout the creation of an affordable home while denying the homeowner the benefits of gradual value building."

Though inclusionary zoning has yet to produce many housing units, similar lengthy restrictions have been placed on other developments that include affordable units in the District. When the CityVista condominiums in Northwest Washington went on the market a few years ago, 1,800 people applied to purchase 59 affordable housing units. That number was whittled down to 500 who met the income guidelines and were deemed eligible to buy. Yet it took more than two years to sell all the units, as many eligible buyers dropped out when they learned about resale restrictions.

The wariness of low- and moderate-income residents to buy properties under such restrictions -- and lenders' reluctance to provide loans on them -- make it difficult for developers to fully recoup their investment.

A better alternative to the permanent resale restrictions would be for the city to institute a five-year resale restricted period coupled with a "subsidy recapture" provision in the law. If a low-income person purchases a unit that is worth $250,000 from a developer for $200,000, then the $50,000 "discount" would be considered a subsidy that would be repaid to the city to produce more affordable housing when the homeowner sells or refinances. The homeowner would benefit from being able to fully utilize, like in a typical purchase, any appreciation accumulated above the original $250,000 value after the five-year period.

Promoting homeownership with the ability to realize equity is the most fundamental way of addressing the asset disparity in the District. Without doing so, with each passing generation, the gap between the rich and poor widens.

Shiv Newaldass is director of advocacy for Manna Inc., a D.C.-based nonprofit organization that develops affordable housing and educates low-income people on homeownership.

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